HMRC IR35 Tax Court Defeat by Contractor Affects All Freelancers

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21st May 2018

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HMRC IR35 Tax Court Defeat

There has been a heavy HMRC IR35 Tax Court Defeat which has ramifications for all freelancers and contractors.

HMRC claimed that an IT Contractor, a Mr Wells, fell inside IR35 on a contract.

The HMRC IR35 Tax Court defeat will affect all contractors – especially those working in the public sector.

IT Contracting for 25 Years

Altogether he has been IT Contracting for 25 years. During that time he has provided his services to 20 different clients. He has completed a total of about 60 contracts.

Surely that in itself differentiates him totally from a permanent employee.

They say that you are more likely to be struck by lightning than be investigated for IR35.

Well, this is the second time that this IT Contractor has been investigated for IR35.

Represented by Qdos Accounting

Qdos Accounting represented him successfully.

He contracted for the DWP through Capita, via his personal service company Jensal Software Limited. Also, he renewed his contract every three months.

However, HMRC considered him to be a disguised employee and wanted him to pay the IR35 tax.

They said he owed them £26,669 in back tax, NI, penalties and interest.

Mutuality of Obligation

HMRC argued that there was a Mutuality of Obligation. They said that WP had to provide work for him and he had to do it. This is despite the contract between the two parties saying that there was no Mutuality of Obligation.

There was a Right of Substitution Clause in both the contract between Capita and DWP and between Capita and Jensal.

HMRC argued that it wasn’t effective as it was too widely drawn and WP would have to give their permission.

Supervision and Control

HMRC claimed that DWP had control over his work and that they integrated him into the project team.

However, DWP managers attested that he didn’t attend WP meetings as the staff did, carried out work as he saw fit and they couldn’t move im to another project or other work without himself and Capita agreeing to it.

In Business on His Own Account

HMRC said that he was not in business on his own account. Their reasons were twofold:-

1. He was on a daily rate. They reckoned that this was really a salary.

2. There was no opportunity for him to profit – because he wasn’t paid for overtime.

However, there was nothing to prevent him form doing other work for other clients at the same time. Permanent employees are not allowed to do that without express permission.

The court rejected HMRC’s plea that there was no financial risk with the DWP contract. The court said that he would have had to fix problems in his own time.

Contract Not One of Employment

The judge decided that the contract was not one of employment. So, Mr Wells was outside IR35.

Her reasons were:-

1. There was a Right of Substitution

2. Mutuality of Obligation was minimal. There was a period between contracts when DWP offered no work. DWP had no obligation to offer future contracts.

3. Although here was a measure of control and supervision it was a lot less than that they exercise on permanent employees.

4. He was in business on his own account. He had to take out professional indemnity insurance, unlike permanent employees. Also, he didn’t have any benefits or training that permanent employees get. He had an obligation to correct his work.

One question that needs to be asked, is, if HMRC are getting it so wrong time after time when the accuse contractors of being inside IR35, how can they create a definitive tool which shows whether contractors are inside IR35 or outside IR35?

This HMRC IR35 Tax Court defeat will reverberate throughout the freelance profession.

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